Changing Variances of Fundamentals and the Behavior of Returns (Economics)

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The time-varying nature of ex ante predictable movements across different assets has emerged as an empirical regularity in recent studies of foreign exchange, the term premium, and stock returns. Dr. Lewis will investigate the potential effects upon these ex ante returns from changing variances of fundamentals. She will study these effects by addressing three basic questions: (1) During periods of significant changes in the variance of fundamentals, do risk premia across different types of assets move systematically in the direction implied by the ICAPM? (2) Are the variances of fundamentals sufficiently mean-reverting to help explain the empirical puzzle found in Lewis (1988), that the constant covariance ("beta") ICAPM is rejected at shorter but not longer horizons? (3) If variances of fundamental change periodically, do market expectations of these potential shifts exacerbate the time-varying nature of returns? Dr. Lewis will teach a Ph.D. level course in international macroeconomics/finance. In addition, she will conduct faculty seminars based on her research, attend faculty meetings, counsel women graduate students, and present business and government women economist guest speakers to undergraduate students. This project furthers VPW program objectives which are (1) to provide opportunities for women to advance their careers in engineering and in the disciplines of science supported by NSF and (2) to encourage women to pursue careers in science and engineering by providing greater visibility for women scientists and engineers employed in industry, government, and academic institutions. By encouraging the participation of women in science, it is a valuable investment in the Nation's future scientific vitality.